Wednesday, May 25, 2016

I have consolidated my blog and my website on squarespace. If all goes according to plan: you will be able to find new and existing blog posts HERE as well as a link to my updated shiny new website. Fingers crossed: this should be up and running in the next 72 hours if all goes according to plan. 😎

Monday, May 9, 2016

I have just completed a new working paper, ”Asset Prices in an Economy with Two Types of People”. You can find it as an NBER working paper here, as a CEPR discussion paper here, or directly from my website here. The paper shows how asset price volatility may be driven by non-fundamental shocks.

The paper constructs a formal mathematical model to capture the idea that free trade in capital markets does not lead to optimal outcomes.[1] We would all be better off if national governments were to regulate the capital markets through counter cyclical trades of debt for equity. In a second new working paper, "The Theory of Unconventional Monetary Policy" coauthored with Pawel Zabczyk of the Bank of England, we show how those regulations would work in a simple two-period general equilibrium model. As Ben Bernanke said in the aftermath of the Great Recession; "Quantitative Easing works in practice but not in theory". We show in this paper why it works in theory. The paper is available from the NBER here, CEPR here and from my website here.

Friday, May 6, 2016

This is my first post for a while: so, sorry if you missed me. I've been busy writing books and papers. I received the final galley proofs this week for my new book, Prosperity for All: How to Prevent Financial Crises. You can pre-order it from OUP or Amazon and it will ship on September 1st.

I also finished three new working papers that I will say more about in future posts.

I've been consistent in my criticisms on this blog of attempts by Paul Krugman to revive the IS-LM framework. That's not because I'm opposed to IS-LM as it appeared in its earliest incarnations; the papers by John Hicks and Alvin Hansen. It's because of the bastardization of the Keynesian agenda by what my friend and teacher David Laidler referred to as North American Keynesianism. In my view, articulated in Prosperity for All, macroeconomics went off the rails in 1955 when Samuelson introduced the neoclassical synthesis in the third edition of his textbook, Economics: An Introductory Analysis. (See Pearce and Hoover for a great discussion of the influence of Samuelson's text and my book How the Economy Works).

Saturday, March 26, 2016

There are religious nonconformists. There are climate change deniers. And there is now a new class of political agnostic: the secular stagnation skeptic. According to a piece in Time magazine this week, Barry Eichengreen finds the issue of secular stagnation so divisive amongst academic economists that he has coined a new term to help us sort ourselves into believers and non believers: the

Steam Boat off Harbour's Mouth: J.M. Turner

secular stagnation Rorschach Test. I like that term. And as I look at the ink blot of incoherent theory and misinterpreted facts that is presented to us for interpretation I find myself peering at a late Turner painting. I am straining to see the ship in the blizzard.

The Time piece is supposed to explain, to the layperson, what economists mean by secular stagnation. It serves only to spread the confusion that was laid by Larry Summer’s original article in which he resuscitated the term ‘secular stagnation’, originally coined by the American economist Alvin Hansen.

Monday, March 14, 2016

Here is a link to my Bloomberg TV segment today on "What'd You Miss" with Scarlett Fu, Alix Steel and Joe Weisenthal: In which I

argue that the Phillips Curve is like the Planet Vulcan. Although observed by eminent astronomers in the early twentieth century: it was never actually there. The Phillips curve seemed remarkably stable in a century of UK labor market data. But as soon as Phillips published his eponymous article, it vanished. That didn't stop economists from seizing on the Phillips curve as a building block of macro theory to prop up the neoclassical synthesis; Samuelson's attempt to connect Keynesian economics with classical ideas.Why is this relevant? Because central bankers think that by lowering interest raters even further they will create inflation. This is a bad mistake. We need to raise rates now and support the value of risky assets by trading an ETF in the stock market.Much more to come in my forthcoming book "Prosperity for All", coming in September from Oxford University Press.

Here is a link to an LA Times interview by James Peltz that features my work on link between confidence, the stock market and unemployment. Here is an excerpt.

So you believe the stock market can directly affect the economy?

"Yes: When people lose confidence in the market and when the market stays down for three, six months at a time, people start paying attention."

Paying attention in what way?

"Imagine you're a 65-year-old couple and you have money invested in a 401(k). Now if your 401(k) drops for a week and then it comes back up again, you're probably not going to do very much. But if your 401(k) drops for three months or six months or a year, maybe you're not going to take that cruise you were going to take. Maybe you're not going to put money into your grandchild's college education.Those decisions impact the economy. When people feel less wealthy they spend less. When they spend less, firms lay off workers and unemployment increases, and the fall in wealth becomes self-fulfilling. I believe when we feel rich we are rich."

Why is confidence so critical?

"If people are not out in the shops buying things, then firms are not going to be hiring people and one of the ways they respond is laying people off. And when people get laid off, profits fall along with demand and the drop in profits validates the original belief that their wealth was worth less. The stock market is a reflection of how wealthy we all think we are."

Thursday, February 25, 2016

Jess Benhabib and I are running our second annual conference on multiple equilibria and financial crises at NYU over the weekend with the support of the C.V Starr Center.We have a great lineup with a guest dinner talk from Costas Azariadis with "reflections on multiple equilibria". Here is a link to the program.

Wednesday, January 20, 2016

Here is an update of the graphs I used here to point to the link from QE to the stock market.

The market is down 10% since this time last year. If it stays down and falls further, look for a spike in US unemployment. I showed here that the stock market Granger causes the unemployment rate. Surely the Fed is aware of that by now. The question is: do they accept my causal explanation that sees low confidence as a self-fulfilling prophecy.

How should government respond to a situation of high unemployment and low growth? If you are a classical RBC kind of person: the answer is simple. Get out of the way. Let the market perform its magic.

If you are a New Keynesian sticky price kind of person: the answer is also simple. Let the Fed do its magic by lowering the interest rate to stimulate aggregate demand. I have a different answer: replace long dated Treasury bonds in the hands of the public with cash or with short dated Treasury bills.

Many Keynesian economists, journalists and bloggers have argued that, when at the zero lower bound (ZLB) we must repair our infrastructure. Build roads. Build bridges. Build airports. They argue that, when the overnight rate is zero and the thirty year rate is lower than it has been for a century, public infrastructure should be paid for by borrowing at the long end of the yield curve. Float thirty year bonds. Better still: issue Consols that will never be retired.

While I agree that public expenditure in a depression may be helpful: issuing long bonds is not the right way to do it. I agree with Adair Turner that it is better to finance an expansion by printing money or borrowing in the Treasury bill market. Better still: as I argued in How the Economy Works and as Mark Blyth and Eric Lonergan have argued (here) print money and give it to those who know how to spend it: that would be you and me.

Borrowing at the long end of the yield curve is a bad idea because there are still active private participants in that market. There is not one interest rate: there are many. And although it is not possible to crowd out private expenditure at the short end of the yield curve; it is still possible to crowd out private expenditure at the long end.

The maturity structure of debt in the hands of the public matters. As I argue here, it matters because our children and our grandchildren cannot participate in financial markets that open before they are born.

Once one recognizes that the way that public expenditure is financed matters: it is a short step to recognizing that it is all that matters. If the Treasury increases the stock of thirty year bonds in the hands of the public, it will drive up long yields and crowd out private expenditure. If the Treasury reduces the stock of thirty year bonds held by the public, it will lower long yields and crowd in private expenditure. That leads to the argument for Qualitative Easing. A policy that removes long bonds (or other long dated risky securities) from the hands of the public and replaces them with cash or with Treasury bills, will crowd in private expenditure and increase aggregate demand.

Critics of QE have argued that QE3 was less effective than QE2 and QE1. That is true. But Fed intervention in the asset markets was undone by the Treasury that was simultaneously changing the yield composition of its debt to take advantage of low long-term interest rates. My message to the Fed and the Treasury is simple: can we please play cooperatively? Much more coming soon on this topic in a forthcoming book.